Shale 'Revolution' and the Impact on Mechanic’s Liens

July 28, 2014

As noted by a growing number of sources, natural gas, specifically shale gas, is booming in the United States like few other industries have in some time. But as people count on future money and positive trends, seemingly all growth areas have their bumps in the road, at best, and, at worst, watch bubbles burst spectacularly. There is little historic evidence to say there won’t be problems on some projects related to gas, specifically construction-related improvements that could affect service providers and materialmen. It begs the question: will mechanic's liens play a role in future line and well improvements?

"I certainly would not tell a client that it is not an option. I think there is an argument that you can, in fact, file a mechanic’s lien on such a project," said Kit Pettit, a senior associate with the Pennsylvania firm Bernstein-Burkley PC. "Yes, there is a certainly a lot of money in the industry right now and typically there is plenty of cash flow to pay vendors and contractors performing well. At the same time, there are a number of new entities or startups looking to get work. You may very well have companies that fail to perform properly. You may have companies that don’t know what they’re doing or perhaps expanded too quickly or don’t have employees with enough skill or training."

Mechanic's liens vary greatly from state to state, even among high-production states, according to Chris Ring, of NACM’s Secured Transaction Services. For example, the lien laws of Pennsylvania seem significantly more vague than those of Texas or Oklahoma (all three are among the top five in US states producing natural gas). As noted by Pettit, there still exists sparse case law available on the topic that is applicable to the current situation, in part because the boom conditions mean there have been few problems to date.

Ring said mechanic’s liens can, and should, be used in the event of a problem on an oil and gas project. Importantly, like in any construction or improvement situation, due diligence is critical even if lien rights exist and are specific. “Obtaining and verifying job information is the key first component,” Ring noted. “And, the farther down the ladder of supply you are, the more risk associated with non-payment. Those companies who are supply materials and services to subcontractors on oil and gas projects will hear the same objection to payment as they would on traditional construction credit projects, ‘I can’t pay you because I haven’t been paid.’”

James Vogt, Esq., partner at Reynolds, Ridings, Vogt & McCart PLLC in Oklahoma, said he believes the mechanic's lien statutes already on the books in that state would prove helpful if invoked by materialmen and service providers. He recalled that a number of oil and gas liens were filed in Oklahoma during "the big bust" in natural gas in the 1980s, with some success.

Karen Hart, partner at Texas-based Bell Nunnally & Martin LLP, also pointed out that definitions within that state's mechanic's lien law appear clear enough to apply with some level of confidence. That is not to say the process is by any means easy and that such lien filings won't be fraught with challenges at the slightest hint of incorrect information. "The hardest part about perfecting oil and gas liens is identifying the well through an API number and who is in the contract chain," Hart said. "This is where a job sheet that is completed accurately on the front end can be so handy. It's also difficult identifying the lease and figuring out the legal description of the land and who owns it."

In short, though the money train seems to be rolling, it appears those dealing with projects related to natural/shale gas improvements would be best served to begin getting educated on the topic, or contact people who are.